NAB Plans To End Home-Loan Discounting And Maintain Its High Yielding Status


National Australia Bank (ASX: NAB)’s CEO Mr. Andrew Thorburn’s decision to stop chasing new business with higher discounts and has put the bank in uncharted territory as the bank announced further deterioration in its net interest margin. The net interest margin is the difference between the rate at which the bank borrows money and the rate at which it lends money. NAB’ net interest margin reduced to 1.84% in FY18 from the second half of FY18 which was at 1.87%, exhibiting degrowth of 3 bps.

Currently, NAB is facing a tough time in convincing the market that the strategy of discounting mortgages for new business is no longer required as it is only worsening the cycle of customer churn and it is not in the best interests of the customer or the bank. The results of FY18 were very much affected by restructuring-related costs and customer-related remediation due to which the overall cash earning of the bank reduced by 14.2% to $5,702m in FY18 as compared to the prior corresponding year. NAB is re-examining its business model as it plans to further grow the business. 

Mr. Thorburn said the bank’s transformation program is on track and making good progress as it is planning to boost up the investment by $1.5 billion over the next three years to September 2020 bringing total investment spend to around $4.5bn. During FY18, NAB invested $1.5 billion, focused on delivering a better customer experience and more reliable and resilient technology. This three-year transformation program will help the bank to maintain the status of the highest yielding of the big four banks in Australia. Also, the bank is planning to sack around 6,000 employees and bring in 1,500 people with different skills. Mr. Thorburn is planning to make the cost to income ratio to come down to an industry leading 35 percent. In FY 2018, around 1,900 employees left the bank due to which the costs were reduced by $320 million.

In FY18, the operating expenses of NAB uplifted by 6.4% in FY18 which reflects additional investment in customer and technology initiatives. The increase in the operating expenses was consistent with the bank’s commitment to reshape and simplify its business, and it was within the previously announced FY 2018 expense guidance of 5-8%.

As per the recently released bank’s financial report, the outlook for the Australian and New Zealand economies is looking positive as solid economic growth is expected in Australia due to the support of strong government infrastructure spending, mining exports and improving non-mining business investment. On 1 November 2018, NAB board declared a dividend of 99 cents per share, fully franked and the bank also announced that it has updated the dividend reinvestment plan (DRP) and bonus share plan (BSP) terms and Conditions.

In the last six months, the share price of NAB decreased by 13.92 percent as on 1 November 2018. NAB’s shares traded at $25.210 with a market capitalization of circa $69.31 billion as on 2 November 2018 (AEST 4:00 PM).


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